Youku.com, China’s Version of Hulu/Youtube, is Poised to Be Best New Stock Launch in Years

Yahoo! FinanceQuote for YOKU/As we posted earlier this week, a number of Chinese Internet companies are scheduled to go public on US exchanges and their arrival is generating significant investor excitement. This morning Youku.com (NYSE: YOKU) arrived on the New York Stock Exchange and opened with an initial trade 111% above its offering price. The company sold 15.8 million ADSs at $12.80 and raised over $200 million.

Although the day is still early shares have traded as high as $38 (as of 12:30pm) but is now in the $30-$35range. According to WSJ.com, “if Youku hangs on to its gains, it will be the best-performing stock since the New York Mercantile Exchange rose 125% in November 2006.” It may even surpass the 125% bump if recent activity holds.

So what is Youku.com? Well, it is an online destination for Chinese video content that operates on a hybrid model of US video content leaders Youtube and Hulu because it aggregates both user generated videos (ala Youtube) as well as an extensive library of professional video content (ala Hulu). Its professional video content includes tv series, movies and music videos.

Despite the excitement of this Chinese video company the arrival of so many Chinese stocks on US exchanges may just be a reflection on the dim outlook many investors have of domestic US market growth compared with China’s ongoing expansion of its markets and the growing consumer purchasing power of an expanding middle class. According to Internet World Stats (as of June ’10) China’s online user base of over 420 million people accounted for only 31.6% of the total population. This is a dramatic difference when compared with the US which has an online user base of around 240 million people which represents 77.3% of the population.

So the market potential is clear but the hurdles for profitability and success in China are also sizable. In a Reuters article last Friday Melanie Lee and Clare Baldwin offered an in-depth analysis of the relative merits of investing in Youku.com or its leading competitor Tudou.com (expected to IPO later this month or early next year) versus waiting for an opportunity to invest in a domestic US video content leader such as Hulu. There analysis provides a thorough comparison of the merits of the business models for US content providers versus their Chinese counterparts. Without addressing their conclusions, listed below are some of the difficulties that they identified for Youku.com’s long-term viability:

Despite tremendous revenue increases over the last couple of years (over 1000% per year), neither Yukou nor its leading competitor have been able to generate any profits with their ad-based revenue models,

In fact the company’s net losses continue to widen as it grows — up 22.5% to RMB167 million (US$25 million) in the nine months up to September 30,

The heavy hand of government regulation which leaves uncertainty about the ability for the company to adapt its business model,

Issues of piracy are an issue for all content providers but it is a particularly well entrenched among the Chinese and may make the potential launch of a subscription based business model more difficult.

“The growth aspects of this industry are very attractive. But attractive end-market growth doesn’t necessarily translate into an attractive investment opportunity…The dotcom bust proved that growing revenue and losses at the same time is not a business plan that is viable.”
– Michael Gaiden, IPO analyst, Morningstar.com

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